Strike A Balance
Indian equities in line with the global markets are trading at elevated levels. Off late, even though the markets have turned volatile, the benchmark indices seem to be holding their ground near all-time highs. The steep one-way rally over the last 18 months has started to make many conscious investors a tad uneasy. The fear of losing value of their invest- ments, if there is a market fall, is undoubtedly gripping investors. At such a time, investors are increasingly considering how one can limit the portfolio downside in case the markets were to go volte-face.
Rising concerns amid global uncertainty in terms of central bank policy, steady uptick in inflation and crude oil prices are all factors which are weighing heavy on the minds of investors. Both new as well as existing investors are apprehensive as to what needs to be done with respect to their equity investments. It is here that the balanced advantage fund (BAF), which is a hybrid fund, can be very useful for an investor. What is a balanced advantage fund? As per SEBI scheme categorisation, a balanced advantage fund is a hybrid category fund wherein the investment in equity and debt asset classes is managed dynamically.
A Sound Strategy
Here, the onus is on the fund manager to gauge the market opportunities and deploy investments accordingly. The general idea behind the category is to manage assets in a manner wherein the investment has an element of downside protection, making this an evergreen category which can be a part of any investor’s portfolio. Also, such a strategy helps investors create long-term wealth with minimal volatility. There are different types of balanced advantage funds. Over the past three years, this category has received widespread acceptance among the masses. As a result, most of the top mutual fund houses have launched this category.
However, the challenge is that every offering is unique in the Financial Planning manner it is managed. Some fund follows an in-house model which is largely based on price-to-book and other factors. At the same time, there are other funds in this category managed on the basis of several other market matrices or is momentum based. As a result, the equity allocation in each of these offerings has a wide variance. One of the key positives of this category is that it does not allow our personal biases to affect our investments. During times such as March 2020 when the market corrected sharply, fear stopped most investors from deploying their savings.
On the other hand, when the markets are at euphoric levels, ideally one should be selling but investors prefer to increase their investment at that time. In effect, one ends up losing out on lucrative investment opportunities. By investing in a fund like BAF, which typically tends to increase equity allocation when the market is cheap and vice versa, the fund manager takes the necessary investment decision, thereby helping one to buy low and sell high. Another major attractiveness of the fund is that one can deploy lump sum in the fund without having to worry whether the market is cheap or expensive.
Choosing the Right Fund
We are currently at a time when the market could face challenges because of a global development due to global central banks or due to rising crude oil prices, etc. As a result, one is trying to second guess if this is a good time to invest. In such a scenario, a fund like BAF will largely tend to be counter- cyclical in nature and prove to be a helpful investment option. When choosing which BAF to invest in at present, the ones with a conservative approach tend to be the most helpful. The logic here is that if the equity allocation of a BAF is quite high in the current market, the recent performance of such a fund would be very encouraging. However, if the market were to turn volatile due to any reasons, such high equity allocation may be a hurtful proposition. So, it is necessary to strike a balance.
The writer is Gen. Manger, PTIC Corporate Services Pvt Ltd
Email: sanjeev@pticindia.com
Website: www.pticindia.com